Good morning and good evening, ladies and gentlemen. I would like to welcome everyone to Giant Interactive Group’s first quarter 2012 earnings conference call. (Operator Instructions).

Now I would like to transfer the call to the moderator, Mr. Rich Chiang, Investor Relations Director of Giant Interactive.

Rich Chiang

Good morning, ladies and gentlemen. Welcome to the first quarter 2012 earnings conference call for Giant Interactive Group. With me today are Ms. Wei Liu, President; Ms. Jazy Zhang, Chief Financial Officer; and Mr. Xuefeng Ji, Vice President of Research and Development.

As we proceed through our prepared remarks, we will refer to our results presentation which can be downloaded from our website at www.ga-me.com. Following the remarks, Ms. Liu, Ms. Zhang and Mr. Ji will be happy to take your questions.

Before we continue, I would like to remind you that statements on this call that are not strictly historical in nature constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended, and as defined in the Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expects, anticipates, future, intends, plans, believes, estimates, and similar statements, and including, among others, statements regarding our expectation of sequential top-line growth in the second quarter 2012, the continued improvement of our operating metrics, the continued growth of ZT Online 2, the effects of our studio reorganization, and the timetable for engineering testing, closed beta testing, open beta testing, introduction, and commercial launch of the various products in our game pipeline.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results of Giant to be materially different from the historical results or from any results expressed or implied by such forward-looking statements. These factors include but are not limited to the risks discussed in filings with the Securities and Exchange Commission, including our annual report on Form 20-F filed on April 23, 2012. All forward-looking statements are qualified by their entirety by this cautionary statement and Giant undertakes no obligation to revise or update this information to reflect events or circumstances the date hereof. In addition, please note that references in the presentation to dollars refer to US dollars.

Now, I would like to turn the call over to our CFO, Jazy Zhang. Jazy?

Jazy Zhang

Thank you, Rich. Good morning to those of you in the east and good evening to those in the west. First, I would like to read the prepared remarks from our President, Ms. Wei Liu, and then I will walk you through our financial highlights and update you on our game development progress.

We are pleased to report a strong start to 2012, having delivered healthy top and bottom-line financial growth and an improvement in our key operating metrics. The successful development of ZT Online 2 into a new blockbuster game continued to drive our results for the first quarter and demonstrate our ability to continue developing hit games in the current competitive MMO market.

We’re especially encouraged by the sequential increase in average paying accounts and average revenue per user in a quarter in which we did not launch any significant game upgrades or marketing campaigns. We believe that incremental improvement in these operating metrics highlight the underlying appeal of a truly innovative game such ZT Online 2. And with the strong response to the launch of the first expansion pack of ZT Online 2 in April, we believe there is still room for further growth of this blockbuster game in coming quarters.

We’re also pleased to see continued stable performance in our legacy game portfolio, namely the ZT Online 1 series where continuous game enhancements have helped to keep players engaged and attract former players to return to these games. Extending the life span of all of our games and increasing user stickiness is a key element of our growth strategy, and we are pleased to see our continued execution and success on this front.

While ZT Online 2 represents our latest success, we’re working extremely hard on developing the next generation of hit games, whether they are MMORPGs or web games. The reorganization of our game development studios and the new revenue-sharing plan that was put into place in 2011 have begun to bear fruit as we are seeing a high degree of productivity and motivation among our research and development teams. As a well-known company in China, we strive to offer our R&D staff the opportunity to turn their ambitions into commercially viable products and be rewarded based on the success of those products. We’re dedicated to building a brand that not only attracts users seeking quality games, but also attracts developers dedicated to building those games. With talented game developers, substantial resources and a focused strategy, we believe we will be able to deliver more hit games in the future.

As we have always stated, we remain committed to our core competency in MMORPG game development, while at the same time we are expanding into new game genres, including action casual games such as Elsword, web games and our first-person shooter game in the near term, and longer-term initiatives in the mobile game segment.

Web game was a newly-added division in our R&D department and we currently have six web games under development, covering genres from action role-playing games, advanced 3D games, strategy games, and casual social games. We also continue to expand the geographic reach of our game portfolio following the official launch of the Golden Land in Russia. We’re constantly seeking new markets for our games and innovative international operators with which to cooperate to expand our roster of licensed games, and have a dedicated internal team focused on this effort. In fact, we expect the Vietnamese version of ZT Online 2 to launch in the second quarter. Our CFO, Ms. Jazy Zhang, will walk you through details of our development pipeline achievements for the first quarter later in the call.

In conclusion, we have established a strong operational foundation that is delivering consistent and sustainable growth and our commitment to our R&D has provided us with a healthy pipeline with potential hit games, many of which are expected to reach value-driving milestones in the second quarter of this year. We remain confident in our outlook and in our financial position as we have demonstrated through our commitment to returning value to our shareholders. We will continue to focus on our strategy to produce games that are of superior quality, games that meet players’ evolving tastes and demands, games that last. We’re confident that through hard work and innovation we will be able to deliver positive results and generate returns for shareholders in the year ahead.

This concludes the opening remarks from President Liu. And now I will walk you through our financials.

Let me now turn to our key operating -- operational metrics for the first quarter on slide six. Total active paying accounts or APA grew 0.8% sequentially and 22.8% year over year to 2.184 million. Average revenue per user or ARPU was RMB228, up 3.1% over last quarter and up 5.6% over the first quarter 2011. Average concurring users or ACU was 681,000, a 2.1% sequential increase and a 16.2% increase year over year. Peak concurrent users or PCU was down 2.2% sequentially but up 19.4% year over year to 2.288 million.

Our operating metrics continue to be driven by the success of ZT Online 2. While we did not conduct any major marketing campaigns in the first quarter to support ZT Online 2, the sequential rise in APA and ARPU demonstrates that we are continuing to tap into a broader audience of paying users. We believe these trends will continue as gamers advance through the game and become more comfortable with the third-generation in-game economy. And as we continue to grow the user base following the launch of the first expansion pack for ZT Online 2 in April, we’re also pleased to see a positive gamer response to Elsword, our 3D advanced casual game which is currently in open beta testing, and the continued stable performance from ZT Online 1 series.

The healthy performance of our core portfolio of online games contributed to our positive financial performance for the quarter as seen starting on slide seven. Net revenue for the quarter was $80.8, a 2.8% increase from the fourth quarter of 2011 and a 26.2% increase from the first quarter 2011. Our core business online game revenue grew 4.2% sequentially and 30.7% year over year.

Gross profit for the first quarter 2012 was $70.1 million, representing a 3.3% sequential increase and a 29.6% year-over-year increase. Gross margin of 86.7% was up from 86.3% in the previous quarter and 84.4% in the first quarter 2011.

Total operating expenses for the first quarter 2012 were $19.7 million, a 7.4% sequential decrease and a 35.9% increase year over year. The sequential decrease was mainly due to lower sales and marketing expenses in the first quarter of 2012 while the year-over-year increase was mainly a result of the overall growth of our business.

R&D expenses increased 6.4% sequentially and 39.8% year over year to $11.7 million in the first quarter. The sequential increase was due to expenses related to newly-granted restricted shares to our R&D staff while the year-over-year increase was mainly due to increased compensation for our R&D employees.

Sales and marketing expenses were down 59.2% sequentially and 10% year over year in the first quarter to $3.6 million. The sequential and year-over-year decreases were due to the shift in marketing expenses for the first expansion pack for ZT Online 2 from the first quarter to the second quarter 2012.

G&A expenses for the first quarter increased 38.6% sequentially and 60.6% year-over-year to $6 million. The sequential and year-over-year increases were mainly due to the share-based compensation expenses related to restricted shares granted to our management team and other key employees in various G&A departments, and reduced reimbursement from the depository banks related to our ADR program.

Net income attributable to the company’s shareholders in the first quarter was $46.4 million, an 18.5% sequential increase and 11.5% year-over-year increase. The sequential and year-over-year quarterly increase in net income was due to continued revenue growth while effectively controlling costs, and a lower income tax expense.

However, the year-over-year quarterly growth rate in net income attributable to the company’s shareholders was less than that in net revenue due to the following offsetting factors: A, interest income decreased significantly due to our reduced cash, cash equivalents and short-term investments balance following the payment of our one-time special cash dividend of $3 per ordinary share or ADS in September 2011. And B, minority interests in game development studios which is treated as a deduction from the net income attributable to the company’s shareholders increased significantly primarily due to the success of ZT Online 2.

Net margin for the first quarter was 57.4% compared to 49.8% in the preceding quarter and 65% in the first quarter of 2011. On a non-GAAP basis, excluding non-cash share-based compensation, net income attributable to the company’s shareholders was $51.2 million, a 25.2% increase sequentially and a 19.8% increase year over year. Non-GAAP net margin was 63.4%.

Basic and diluted earnings per ADS for the first quarter 2012 were $0.20 and $0.19 on a GAAP basis and $0.22 and $0.21 on a non-GAAP basis.

Moving on to our balance sheet on slide 10, as of March 31, 2012, cash, cash equivalents and short-term investments totaled $290.4 million compared to $297.1 million as of December 31, 2011. This decrease is primarily due to the first payments of our ordinary cash dividend on March 29, 2012, partially offset by cash generated from operation. The second payment was made on April 5, 2012. And the total cash amount of both payments was $71 million.

We’re encouraged by the consistent improvement in our financial performance which highlights the positive momentum we’re gaining as a result of the success of ZT Online 2 and as well as other online game. We expect to increase our sales and marketing activities in the next quarter to support the new expansion pack for ZT Online 2, while continuing to prudently invest in the development of our game pipeline. We have a number of potential value-driving launches expected in the second half of this year which we believe will allow us to maintain steady growth in our financial performance on a full-year basis.

With that, let me now review our game development pipeline on slide 12. As previously noted, the ZT Online 1 series remained stable. We continue to support the franchise with ongoing marketing activities and game enhancements. During the first quarter we introduced a number of online and offline promotional activities for the original ZT Online and introduced a new expansion pack for ZT Online Classic Edition, which included a selection of new game play features, allowing greater in-game customization. We also added additional innovative features to existing game play of ZT Online Green Edition, which has received positive feedback from our users.

ZT Online 2 continues to grow well, attracting new users and new paying accounts. During the first quarter we continued to increase social interactions within the game through the introduction of a large-scale cross-shard PK tournament. Also in the first quarter we officially launched the Taiwanese version of ZT Online 2, which has received a very positive response and has already proven to be popular among gamers.

As previously announced, we launched the first expansion pack for ZT Online 2 in April, which helped the game achieve a new record PCU of over 541,000. The expansion pack included a number of new features including new game functions, maps and game play features. As noted, we have launched new marketing initiatives in the second quarter to promote the new expansion pack, and we expect to see an impact from the increase in gamer interest in the second half of this year.

Following the release of a new expansion pack for Giant Online in the fourth quarter, we continue to make incremental improvements to increase user stickiness during the first quarter. We plan to release a new expansion pack in the second quarter, which will unlock new levels and upgrade a number of game functions to help attract former players back to the game.

We released the second expansion pack for XT Online in the first quarter, which introduced new core game play features and a new PVE dungeon. In addition, a cross-promotion was conducted with the Chinese movie “Joyful Reunion” which helped to raise further awareness and interest in the game.

For the Golden Land, our most broadly-licensed international game, we introduced a new PK system and corps upgrading system during the first quarter, and have received positive feedback from gamers. The Russian version was officially launched in March and the game remains popular in Taiwan, Japan and the US.

As previously noted, Elsword continues to receive positive gamer feedback, and we plan to introduce new characters during its release of an expansion pack in June 2012.

Meanwhile, Allods Online, a 3D, free-to-play fantasy MMORPG developed by Mail.Ru Games recently completed optimization and design customization to allowing its content and features with local market preferences. We began conducting the second engineering testing on May 3, 2012.

Today we are announcing a new self-developed 3D Chinese fantasy MMORPG called World of XianXia. With this game, we have applied our knowledge from analyzing Chinese gamers’ psychology to develop a breakthrough in game design by embedding group versus group game play into the basic architecture and core game mechanics. In World of XianXia, group versus group game play will be a core feature of the game, not just an afterthought like in many other games. We believe Chinese gamers will enjoy this feature, and we plan to begin engineering testing for this game in the third quarter.

Finally, we have been investing more resources into web game development as we believe this will be a major source of growth for us. We have six projects in development consisting of an action RPG based on the Three Kingdoms era, an action RPG based on the core game play and features of the ZT Online franchise, an advanced 3D game using the Unity engine designed for international markets, a strategy game leveraging our experience from developing the Golden Land, and two casual games suitable for publication on social network platforms. These projects are expected to enter various stages of testing in the second half of this year, with launches commencing towards the end of this year and into next year.

We are pleased with our performance in the first quarter and we believe our financial and operational outlook for the remainder of the year remains favorable. We will continue to focus on the execution of our growth strategy to increase player participation and loyalty in our existing games, while developing new games across a range of genres. For the second quarter, we expect to deliver continued top-line growth, supported primarily by contributions from ZT Online 2.

That concludes our prepared remarks. Once again, thank you for joining us today. We will now open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions). We would like to advise that there is a limit of two questions per person.

Your first question comes from the line of Timothy Chan from Morgan Stanley. Please ask your question.

Timothy Chan – Morgan Stanley

Good morning, Ms. Liu, Jazy, Mr. Ji and Rich. Thanks very much for taking my questions, and congratulations on a very solid quarter.

My first question would be relating to ZT Online 2, the PCU hitting new record high. Could you maybe talk about, how does that translate into monetization? And what is the next step to take the game to a new level? And I have a follow-up question. Thank you.

Jazy Zhang

Thanks, Tim.

[Chinese Language Spoken]

Xuefeng Ji

[Chinese Language Spoken]

Rich Chiang

Hi, Tim. Yes, as you mentioned, we’re very happy to see that ZT Online 2 reached a new PCU peak of over 540,000 PCU in April. Now, from our experience, the revenue or monetization impact usually lags a couple of months after we reached new PCU peaks. So that should take quite -- just a little while longer for that to see some effect. But throughout first quarter, PCU and user base was very stable as well. So we’re going to see continued stable growth going forward.

And as for the game itself, we’re going to continue to upgrade the game play and make it even more fun for our gamers. And the next big event will probably be the launch of micro-client version of ZT 2, to make it more accessible for more gamers, making it for them easier to play. We’ve been able to shrunk down the installations filed from 1.9 gigabytes to under 200 megabytes. So, it’s going to be much more accessible for new gamers and the existing gamers to come and try the game.

Timothy Chan – Morgan Stanley

Thank you. Could you maybe also talk about World of XianXia, in terms of the resources and R&D stuff you put into the game, how does that compare to ZT Online 2? And what is your general expectation on the game? Thank you.

Jazy Zhang

Great. Thanks, Tim, for the question.

Wei Liu

[Chinese Language Spoken]

Rich Chiang

For our newly-announced pipeline game World of XianXia, this is a 3D Chinese fantasy MMORPG, has great vivid graphics, so it’s going to look really beautiful. And the game play itself is a little bit different than what people expect in the ZT 2 and ZT series of games. It’s more PV focused, it’s more focused on building up your own character, leveling up, and also more focused on GVG, group versus group, battles and encounters. It’s a little bit more intimate than what we have in ZT 2 which is more a large-scale PK, when you have entire kingdoms fighting other kingdoms in the game.

So with this slightly different user experience, we think it’s going to help diversify the user base. And so far it has -- this project has had great internal testing results from our staff here. So we think out of our pipeline for the rest of this year, this is probably going to be the best-performing game.

Wei Liu

[Chinese Language Spoken]

Rich Chiang

And also in the second half this year, we’re going to probably focus a little bit more to market this new game.

Timothy Chan – Morgan Stanley

Thank you. That’s very helpful.

Operator

Your next question comes from the line of Eddie Leung from Merrill Lynch. Please ask your question.

Eddie Leung – Merrill Lynch

Sure. Good morning. Thank you for taking my questions. I have basically three questions, mainly about financials. The first one is about your minority interest, we see there is a sequential decline in the quarter, so just wondering if there is any change in the revenue sharing formula with your studios, or what would be the reasons behind it? That’s my first question.

And then secondly, could you also talk a little bit more about your margin trend? Because I just heard that you mentioned that from second quarter there could be more marketing expenses to support the upgrade of ZT 2, and that going forward perhaps you also have a pretty good pipeline. So, wondering whether we should see some near-term margin pressure just because of the marketing expenses?

With respect to minority interest, the overall Q1 number is slightly down compared to Q4. This is because this is an aggregate number. This includes all of our game development studios. So, in Q1, as we are beefing up our development schedule on Glorious Mission, we incurred more losses. So, overall the net amount for Q1 minority interest is less than Q4.

The second question relates to margin trend. Yes. We did shift our marketing expenses previously budgeted for ZT Online 2 expansion pack in Q1, and later on because we decided to do -- launch our marketing in the first week of April instead of two weeks before, end of March, so that caused a shift of marketing expenses. But with that said, our overall marketing spending for Q2 should still be relatively low. We’re looking at somewhere between 12% to 14% in terms of the percentage of top-line revenue.

And with respect to your third question, our overall dividend policy, we will continue our annual dividend payments. In terms of the paying ratio, we will leave that to our Board of Directors. Previously we have paid $0.18 a share, which translates to about 25% to 30% payout ratio in the last three years, and most recently we paid $0.30 a share. That translates to a 60% payout ratio.

I hope that answered your questions.

Eddie Leung – Merrill Lynch

Thank you very much. I will get back to the queue. Thanks.

Jazy Zhang

Okay. Thanks.

Operator

Your next question comes from the line of Steve Zhang from Macquarie. Please ask your question.

Steve Zhang – Macquarie

Okay. Thanks for taking my question. My first question, with regards to the strategy for ZT 2, can you give a little more guideline on how do you expect to push out expansion packs for the game, whether semi-annually or what the intervals are? And also, can you talk a little more about the paying rate and the ARPU trends for the game right now? Thanks.

For ZT Online 2, it has entered into a more stable operating sort of level or stage right now after the first expansion pack. So, going forward, we plan to release a new expansion pack for the game every quarter or up to six months, depending on user trends and new game play updates. For the ARPU of this game, it should trend higher over time. And as you can see, that provided a little bit of effect in the first quarter results as well as ARPU crept up a little bit.

Steve Zhang – Macquarie

Okay, thank you. And my second question is in regards to your web game strategy. So, right now it seems your pipeline of web games are all fairly advanced games. Do you -- is that the strategy that you will stick with for the web games segment, or do you plan to go into more casual web game?

Steve Zhang – Macquarie

Okay.

[Chinese Language Spoken]

Xuefeng Ji

[Chinese Language Spoken]

Rich Chiang

For our six web games that we just announced, recently announced, slated for launch in the second half of this year into 2013, they actually cover a broad range of different genres, including both hard core and casual. Now, hard core web games is still the most profitable type of games in the web games segment in China, and their content have a lot of similarities to our MMOs, so it makes sense that we’re going to focus some of our resources on this, to leverage our core competence and experience.

But we also have two games out of the six that are casual social games. And even for the hard core games that we’re doing, we will infuse them with casual and social elements to try to diversify our user base.

Operator

Your next question comes from the line of Jake Lee from Citigroup. Please ask your question.

Jake Lee – Citigroup

Hi. Good morning, everyone. Thank you for taking my question. Just a quick question about the Elsword. Could you please talk more about the game’s performance on the operational level and what’s your expectation for the game’s maybe revenue contribution in the next two or three quarters? And maybe more color about the comparison with competitor games should be helpful. Thank you.

Jazy Zhang

Great.

[Chinese Language Spoken]

Wei Liu

[Chinese Language Spoken]

Rich Chiang

For Elsword, since we launched the open beta testing, an official launch in fourth quarter last year, user levels and revenue has picked up to our expectations and throughout the first quarter as well. In the summertime, summer holiday, summer break, we plan to launch the first expansion pack for this game and launch a new game play and new features to capture new gamers and retain old gamers alike.

Operator

Your next question comes from the line of [May Gehr] from UBS. Please ask your question.

[May Gehr] – UBS

Thank you for taking my question, and congratulations on the solid results. So my question is about the marketing expense. So, is -- on a full-year basis, is the marketing expense more backend-loaded? So, I understand that you have -- you plan to launch a couple of games in the second half of the year. So, does that mean marketing expense as a percentage of revenue is going to be higher than Q2?

Jazy Zhang

Yeah. Thanks for your question. So, on a full-year basis, we expect our marketing -- overall marketing expenses as a percentage of top-line revenue to be around 10%, 10% to 12%. This is, you know, we’re well-disciplined in marketing spending.

The reason the marketing spending for Q2 will be higher is because part of our marketing budget for Q1 was shifted to Q2. Yeah. But overall, on a full-year basis, our marketing spending should be under control.

[May Gehr] – UBS

Okay. And the next question is about, for the new games, when do you expect them to bring in significant revenue?

Jazy Zhang

As of now, it’s really hard to predict exactly how much revenue contribution we’re expecting in terms of whether it’s 3% or 5% revenue contribution. It’s really hard to project at this point of time. But we do have a pretty good projection from our current pipeline.

[May Gehr] – UBS

Okay, thank you.

Jazy Zhang

Thanks.

Operator

Your next question comes from the line of [William Chan] from Barclays. Please ask your questions.

[William Chan] – Barclays Capital

Good morning. Thank you for taking my call. My first question is about your revenue sharing model for studio. Can you please quantify its impact on your revenue and the margins for quarter? Maybe among 77 million online gaming revenue, how much is actually subject to the studio and how should we look at the trend going forward? Thank you.

Jazy Zhang

So we previously announced in our last quarter’s earnings call that we implemented this revenue-sharing model. Basically we share 24% of the net game revenue with our development studio, and each development studio is responsible for their own P&L, which is mainly labor cost. Then you have a net income, out of that net income, the studio as a team takes 49% of ownership and Giant takes 51% of ownership. So, overall in terms of margin trends, we expect on a quarterly basis or on an annual basis we will see a margin erosion of approximately 45%.

[William Chan] – Barclays Capital

Okay. And then my second question is also about web game. Given the six games on the pipeline, so in terms of future web game distribution, does Giant have any plan to build up in-house [platform] or maybe leverage third-party web game [platform]? Thank you.

Xuefeng Ji

[Chinese Language Spoken]

Rich Chiang

For future web games, we plan to publish them and operate them both ourselves on our own servers and in cooperation with domestic third-party platforms.

[William Chan] – Barclays Capital

Okay. Thanks.

Operator

Your next question comes from the line of Wendy Huang from RBS. Please ask your question.

Wendy Huang – RBS

Good morning, everyone. My first question is a follow-up on the sales and marketing expenditure. How much do you budget for marketing and promotion on ZT 2 in Q2? And also regarding World of XianXia, you mentioned that this will be one of the focus for the second half pipeline. So, since you mentioned that you will start engineering tests in Q3, should we assume that peak for the marketing expenditure for this game to happen in Q4? Then I have a follow-up. Thank you.

Jazy Zhang

Okay. So, Wendy, so our sales and marketing expenses are lower, that’s because we shifted part of our marketing budget for ZT Online 1 first expansion pack to Q2. So, Q2 marketing expenses will be a little bit higher. But overall, on a full-year basis, we do expect overall marketing expenses to stay within 10% to 12%. There might be fluctuation between quarters based on -- depending on when we will launch a large-scale marketing campaign. But on a full-year basis, it should be within our guideline.

Wendy Huang – RBS

Okay. My second question is regarding web game. Can you remind us how many web games is under the commercial launch right now? And what’s the percentage revenue coming from your existing web games? And also regarding the six web games in pipeline and also maybe you're developing more web games for the longer term --

Operator

Thank you for holding. This is the operator. May I have your conference ID please? Hello, this is the operator. Are you on the line?

Yeah. Thank you. Okay. Yeah, webcast lines. Okay, one moment.

Jazy Zhang

-- the six web games that are currently under development will enter various stages of testings or launches towards later half of this year and into next year.

Wendy Huang – RBS

Okay. Thank you, Jazy.

Jazy Zhang

Thank you, Wendy.

Operator

Your next question comes from the line of Jin Yoon from Nomura Securities. Please ask your questions.

[Ruby] – Nomura Securities

Hi. This is [Ruby] sitting in for Jin Yoon. Thank you very much for taking my question. Just a quick question on your gross margins, I noticed that your gross margins are higher in the quarter and you mentioned cost control efforts. I'm just wondering, going into the rest of the year and in 2013, will we see the similar trend as what we saw in the quarter, or how would you describe the -- what we should expect there?

Jazy Zhang

Okay. Thanks, Jin, for your question. So, if you look at the gross margin for Q1 versus Q4, the Q1 gross margin improved slightly. That’s because basically if you look at the cost of sales for Q1 versus Q4 last year, it remains flat. Therefore, gross margin for this quarter increased slightly. But on an ongoing basis, we expect our overall gross margin to be somewhere around 84% to 86%.

[Ruby] – Nomura Securities

I see. Thank you very much.

Jazy Zhang

Sure. Thank you.

Operator

Your next question comes from the line of Mark Marostica from Piper Jaffray. Please ask your question.

Mark Marostica – Piper Jaffray

Yes, thank you. Nice job on the quarter. I wanted to ask a broader question with regards to net margins for fiscal 2012. And what I'm trying to get an idea of is, with all of the various moving parts, gross margins which you just talked about, and of course the new arrangements with the development studios, how we should think about the trending of overall net margins in 2012 versus 2011. Thanks.

Jazy Zhang

Okay. Thanks, Mark. So, for 2012, on a full-year basis, we expect a margin -- overall margin erosion of 5% due to the revenue sharing, minority interest carve-out from our development studios. But this number may fluctuate quarter from quarter, depending on, you know, some subsidiaries are currently incurring losses as they are undergoing game development. Some other subsidiaries are incurring net profit as they have already launched their games and have very nice yield on their games.

Mark Marostica – Piper Jaffray

Thank you.

Jazy Zhang

Thanks, Mark.

Operator

Your next question comes from the line of Jialong Shi from CLSA. Please ask your question.

Jialong Shi – CLSA

Hi, thank you. Thank you for the call. I’ve just rejoined the call, apologies if my questions were already answered. I have two questions.

The first question is on CapEx. How much is your CapEx for this year?

Jazy Zhang

So, historically, on an annual basis, we have, on average, we incur about RMB80 million CapEx. This year the amount will be slightly lower, slight lower, yeah. Overall for companies like us, the CapEx spending is not that high.

Jialong Shi – CLSA

Okay. My second question is on your new games. If I understand correctly, you do not seem to have any mobile games under development. So, could you talk about your mobile game strategy and also news on -- you could share your views on the status quo and outlook on China’s mobile game industry, that will be very helpful. Thank you.

Jazy Zhang

Thanks, Jialong.

[Chinese Language Spoken]

Wei Liu

[Chinese Language Spoken]

Rich Chiang

Hi, Jialong. Yes, the future in the mobile industry is very bright in China, there will be lots of opportunities. And for us, so far we’ve invested, as you know, in mobile platform company called Mobile Embedded, [Yang Shing], and we’re going to cooperate and do some things together over in the near future.

Operator

Your next question comes from the line of Andy Yeung from Oppenheimer. Please ask your question.

Andy Yeung – Oppenheimer

Hi, good morning. Thank you for taking my questions. My first question is about also about web games and mobile games. Can you give us some color on the current scale of your developments in both areas, and also any future plan to expand those teams? And also for both game types, what’s your view in terms of being a game developer versus being a game platform operator?

Jazy Zhang

Those are excellent questions, Andy.

[Chinese Language Spoken]

Wei Liu

[Chinese Language Spoken]

Rich Chiang

Currently we have around 150 developers working on web games, working on our six web games. On the mobile side, as we mentioned earlier, we invested in Mobile Embedded. They have around 200 to 300 people working on smartphone developments right now.

And as to strategy for game development versus platforms, our core competence is developing games, focusing on game design. And whether that includes client-based games, web games, or future mobile games, it’s all really the same to us, and we believe content is king. So, whether it’s web or mobile, it’s just different platforms or different locations where our users can access our games. And so we’re going to continue focusing our efforts on this front.

And for the web games that we have in our pipeline, for some of them, we will operate them ourselves and also cooperate with third-party platforms as well.

Andy Yeung – Oppenheimer

Great. Thanks. That’s helpful. Just one quick question on your FPS game Glorious Missions, any updates on when you would commercially launch that game?

Jazy Zhang

[Chinese Language Spoken]

Wei Liu

[Chinese Language Spoken]

Rich Chiang

For FPS project, currently we’ve completed the version for the Chinese military, and we’re hard at work working on the retail version, which enter in testing in the second half of this year.

Andy Yeung – Oppenheimer

Okay. Thank you.

Operator

Your next question comes from the line of Adam Krejcik from Roth Capital Partners. Please ask your question.

Adam Krejcik – Roth Capital Partners

Yeah. Hi there. Thanks for taking my questions. The first one was on the micro-client version of ZT 2. I was wondering what kind of initial feedback you were getting, and internally how big you expect this version to be. Is it going to be a meaningful revenue contribution or is it just to attract a slightly different user base?

Xuefeng Ji

[Chinese Language Spoken]

Rich Chiang

For the micro-client version of our ZT 2, we’ve been testing this for about two months now, and so far the beta testers have thought that it’s been -- have given us great feedback on this. We plan to launch this micro-client version maybe in a little over half a month. And the goal of this micro-client is we’ve shrunken down the file side, the installation substantially, but we can still offer the same user experience as someone who used to have to download the full installation file. So this just makes the game more accessible for a broader user base.

Then when we do launch it, because it’s actually the same game, we don’t expect too much impact in terms of user number or revenue unless it really takes off and we see a lot of new users. So for that, we’ll have to see.

Adam Krejcik – Roth Capital Partners

Okay, great. And then my follow-up question is on your -- your diluted share count increased quite a bit sequentially this quarter. Can you walk us through again what that 5 million jump was, and then the expectations for the share count I guess in Q2 and for the full year if you have a sense? Thanks.

Jazy Zhang

Thanks, Adam. I’ll take your question. So this jump in diluted share is mainly due to the issuance of restricted share at the end of November last year. At the end of November 2011, we issued about 12.6 million restricted shares to our valued employees. And of course we performed a very comprehensive dilution calculation and at the end the overall increase is 4 million shares on a fully diluted basis.

Adam Krejcik – Roth Capital Partners

Okay. Is this related to the studio, the employees, as part of their incentivization --

Jazy Zhang

No. This is the restricted shares issued to many of our key employees.

Adam Krejcik – Roth Capital Partners

Okay.

Jazy Zhang

Not just the studio employees, the overall GA, Giant employees, yeah.

Adam Krejcik – Roth Capital Partners

And is that kind of an annual or just one-off event, I mean, we shouldn’t expect it again in Q1 or Q2 I guess?

Jazy Zhang

Well, we issued 12.6 million shares, and going forward we don’t expect any significant issuance. If we hire additional key employees, we may issue some, but nothing significant.

Adam Krejcik – Roth Capital Partners

Okay. Great. Thank you very much.

Jazy Zhang

Thanks, Adam.

Operator

Your next question comes from the line of Atul Bagga from Lazard Capital. Please ask your question.

Unidentified Participant

Hi. Thank you for taking my call. So I have one question plus more question for the second one. The first one is recently China game company is promoting their new product line such as Changyou’s game product line of next-generation games. How will Giant respond to that? Will Giant develop some next-generation games as well?

[Chinese Language Spoken]

Wei Liu

[Chinese Language Spoken]

Rich Chiang

Yes. For our competition by their next generation of games, we assume they probably mean that they have next-generation graphics, 3D engines and look better. But we also have games of this nature in our pipeline as well. For example, the World of XianXia that we are announcing today uses our own 3D engine that we’ve been developing for many years and has been tested and tried through many iterations, has very mature engine and deliver very beautiful vivid-style graphics for this upcoming game. And also some of our games that we have in our pipeline as well, whether they are internally developed 3D engines or licensed 3D engines as well.

Unidentified Participant

So my next question is, several people ask about the mobile games, so will Giant also consider to publish any mobile game [inaudible] instead of [Yang Shing] currently? Do you have any plans for that?

Jazy Zhang

[Chinese Language Spoken]

Wei Liu

[Chinese Language Spoken]

Rich Chiang

Currently our plan is to cooperate with Mobile Embedded, the mobile company we invested in.

Unidentified Participant

Thank you.

Operator

You have a next question from the line of Atul Bagga. Please ask your question.

Atul Bagga – Lazard Capital

Hey, you guys. Thank you and congratulations on the quarter. Sorry for this confusion, I have a couple of follow-ups, on your micro-client strategy, you talked about going to be broader user base. Did I understand that correctly? So, does that mean this is going to be a separate game? Is it like a companion app or is this the same game but on a different app? So, what I'm trying to understand, is it more about increasing the engagement of existing users or is it more about going after a broader audience?

And as a follow-up, how would you market micro-client to your users? Thank you.

Jazy Zhang

Great. Thanks, Atul.

Xuefeng Ji

[Chinese Language Spoken]

Rich Chiang

All right. So the goal of the micro-client version of ZT 2 is that it’s actually the same game as ZT 2, it’s just that the installation file is over -- is only one-tenth the size of the original installation file. And once people install it, they can still play together with existing ZT 2 players. So this new installation or micro-client version just makes the game more accessible for new users to come and try the game.

And we believe that micro-clients are the future of client-based games. As you’ve seen in web games now, web games, the game content is getting more sophisticated, it’s actually catching up to the game play in client-based games. So, micro-clients would be the best of both worlds. It’s more accessible, smaller installation files, almost accessible as web games, but we’re able to deliver the same user experience as a full-fledged client game. And so with this conversion of web games and client-based games, MMO games, we believe that now is the right time to start delivering and developing these micro-clients.

Atul Bagga – Lazard Capital

That makes sense. Thank you. And just one quick clarification about the pipeline of games, can you talk about when should we start or when should we expect to see more dilutions of these games in your pipeline?

Jazy Zhang

[Chinese Language Spoken]

Wei Liu

[Chinese Language Spoken]

Rich Chiang

Hi, Atul. So, monetizations from our pipeline games, we’re going to start marketing Allods Online and World of XianXia in the second half, in the Q3 and Q4, but revenue from these games is probably not going to be that significant until probably fourth quarter.

Wei Liu

[Chinese Language Spoken]

Rich Chiang

And for the web games, also launching -- beginning to launch in the second half. We currently have not taken these revenue contributions into account into our current forecast.

Operator

Your next question comes from the line of Martin Bao, CICC. Please ask your question.

Martin Bao – CICC

Thank you. I have two questions. One question, regarding actually Elsword and ZT Online original series and ZT Online 2. As the PCU of the ZT Online reached a new high, I would like to know the current cannibalization level between the two games, between the ZT Online 2 and the original ZT Online. I have another question.

Xuefeng Ji

[Chinese Language Spoken]

Rich Chiang

So, for PCU, our user level, user base ZT 1 and ZT 2, we did see some impact of cannibalization when ZT 2 was first launched over a year ago, but it lasted only a little while, over a year ago. And since then, it’s been very stable. And as you can see, user base has been growing very steadily over the past year. And with ZT 2 continuing to grow in PCU, it’s going to keep growing our entire user base for the whole company.

Martin Bao – CICC

Thank you very much. Another question regarding the original ZT Online, we would like to know the upgrade plans for this series in this year? Thank you.

Xuefeng Ji

[Chinese Language Spoken]

Rich Chiang

For the ZT Online 1 series, we launched an expansion pack in March, and next one should be around July of this year.

Operator

There are no further questions at this time. I would now like to hand the conference back to today’s presenters. Please continue.

Rich Chiang

Thank you again for joining us today, and we look forward to talking to you on our progress in the near future.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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